Chapter XIX - Collection and Recovery of Tax
Section 396
Section 396: tax deducted is deemed income received
Section 396 deems specified deducted sums to be income received when computing an assessee's income. It covers sums deducted under the chapter and certain foreign income-tax paid by deduction where a credit is allowed, subject to two express exceptions.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
The following sums shall be deemed as income received for the purposes of computing the income of an assessee—
(a) sums deducted under this Chapter; and
(b) income-tax paid outside India by way of deduction in respect of which an assessee is allowed a credit against the tax payable under this Act, except tax paid under section 392(2)(a) and tax deducted as per section 393(3) (Table: Sl. No. 5).
Introduction
Section 396 treats the specified tax deductions and qualifying foreign income-tax paid by deduction as income received when computing an assessee’s income.
Its treatment has stated exclusions. Read the cited payment and deduction provisions before applying the deemed-receipt rule to a particular amount.
Key takeaways
Domestic deduction
Sums deducted under this chapter are deemed income received.
Foreign-tax deduction
Foreign income-tax paid by deduction is also covered where the assessee is allowed a credit against tax payable under the Act.
Exceptions
The text excepts tax paid under Section 392(2)(a) and tax deducted under Section 393(3), Table serial number 5.
Amounts deemed received
For income computation, Section 396 includes sums deducted under the chapter and qualifying foreign income-tax paid by deduction for which an Indian tax credit is allowed.
Express exclusions
The rule excludes tax paid under Section 392(2)(a) and tax deducted under Section 393(3), Table serial number 5.
Applying Section 396 in practice
Computation point. A payer's deduction generally does not mean the recipient earned only the net amount. The section treats specified deducted tax, and the foreign tax paid by deduction where statutory credit is allowed, as income received for income computation, subject to its express exclusions. Separate the gross income figure from the tax-credit figure in the return.
Hypothetical: A payer owes ₹1,00,000 and deducts ₹10,000 under the applicable TDS provision. The ₹90,000 cash receipt alone does not define the income; the deduction is handled under section 396 and the credit rules. Checklist: reconcile gross amount, deduction certificate, statement and credit claim. Do not apply the rule to an excluded deduction category without checking the section.
Step-by-step flow for applying Section 396
- 1
Was the sum deducted under Chapter XIX?
Under Section 396(a), sums deducted under the Chapter are deemed income received when computing the assessee's income.
- 2
Was income-tax paid outside India by way of deduction?
Section 396(b) covers it only if the assessee is allowed a credit for that tax against the tax payable under this Act. Whether credit is allowed is decided under the relevant credit provisions, not by Section 396.
- 3
Does the exception at the end of clause (b) apply?
Clause (b) excepts tax paid under Section 392(2)(a) and tax deducted as per Section 393(3) (Table: Sl. No. 5). Check the provision under which the amount arose.
- 4
Compute the income on the gross basis
Add the deemed sum to the net amount actually received. Claim the credit for the tax separately; Section 396 deals only with income computation.
Practical checklist
Do
- Identify the deduction or foreign-tax payment and the provision under which it arose.
- Check whether the explicit section 392 and 393 exclusions apply.
Avoid
- Do not treat every tax payment as income deemed received under this section.
Illustrative example
Worked example: Indian and foreign fees with tax withheld
Hypothetical facts (illustration only, not a real taxpayer): Mr. Pillai, a resident consultant, bills an Indian client ₹5,00,000 (assumed). The client deducts ₹50,000 (assumed) under Chapter XIX and pays him ₹4,50,000. A foreign client pays him ₹1,80,000 after withholding foreign income-tax of ₹20,000 (assumed) on a ₹2,00,000 fee. Assume he is allowed a credit for the foreign tax against tax payable under the Act.
Indian fee
Under Section 396(a), the ₹50,000 deducted is deemed income received. Income = ₹4,50,000 + ₹50,000 = ₹5,00,000.
Foreign fee
Under Section 396(b), the ₹20,000 foreign tax is deemed income received because credit is allowed (assumed). Income = ₹1,80,000 + ₹20,000 = ₹2,00,000.
Exceptions
Neither amount is tax paid under Section 392(2)(a) or deducted under Section 393(3) (Table: Sl. No. 5), so the exception in clause (b) does not apply.
Total
Fees counted in computing income = ₹5,00,000 + ₹2,00,000 = ₹7,00,000, not the ₹6,30,000 actually received.
Outcome
- Mr. Pillai computes his income on ₹7,00,000 of fees.
- Credit for the ₹50,000 and the ₹20,000 is a separate step under the credit provisions.
Frequently asked questions
Are sums deducted under this chapter treated as income received?
Yes, for computing the assessee's income, subject to the section's express exceptions.
When is foreign income-tax paid by deduction covered?
It is covered where the assessee is allowed a credit for that tax against tax payable under this Act. Separately, Section 396 excepts tax paid under Section 392(2)(a) and tax deducted under Section 393(3), Table serial number 5, from its deemed-income rule.
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Talk to our team about TDS credit and gross income computationLast updated 2026-10-10